TSP Funds

The Thrift Savings Plan currently offers ten investment funds. Five are essentially index funds: they mirror the asset allocation (and therefore also the performance) of specific U.S. and foreign stock and bond funds. The other five TSP funds are professionally managed portfolios which are invested in a specific mix (target allocation) of the individual TSP stock and bond funds. There's a lot more to learn about the individual TSP funds, but here's a summary:

The G Fund is invested in U.S. Treasury securities which are guaranteed by the U.S. government. The nice thing about this fund is that it's practically risk free (your investment is guaranteed not to lose any money), and yet the interest rate is substantially higher than what you might earn in other safe investments like bank savings accounts, certificates of deposit, or money market funds. If you are very risk-averse, this is definitely the place to park your savings.

The F Fund is a bond index fund, invested in investment-grade U.S. government and corporate bonds. Its performance is very similar to the publicly available iShares Barclays Aggregate Bond ETF (ticker: AGG).

The C Fund is a U.S. stock index fund that mirrors the performance of the S&P 500 Index, which consists of large U.S. corporations. Its returns are basically the same as the SPDR S&P 500 ETF (ticker: SPY).

The S Fund is invested in the stocks of small- to medium-sized U.S. companies. It's designed to complement the C Fund, so that if you invest in both, you basically own shares in almost all U.S. stocks. There aren't many index funds that track these companies, but if you own both the TSP S Fund and C Fund, then your investment returns will correlate closely to those of a broad U.S. stock market index fund like the Vanguard Total Stock Market ETF (ticker: VTI).

The I Fund is allocated to international stocks. It allows you to diversify your portfolio by investing in the stocks of companies in more than 20 developed countries in Europe, Australia, and Asia. There are several publicly available funds like the I Fund, including the iShares MSCI EAFE Index Fund (ticker: EFA).

The other five funds, the TSP Lifecycle Funds, consist of professionally managed investment portfolios created to meet investment objectives for a specific target date (the date on which you plan to begin withdrawing your savings). The L Fund assets are invested in the individual TSP funds (the G, F, C, I, and S Fund) according to a target portfolio allocation that is adjusted every 3 months. The initial portfolio allocation is risky, with a large percentage of stock funds such as the C, S, and I Fund. As the target date approaches, each L Fund becomes gradually more conservative, by shifting a greater amount of your assets into bonds such as the F Fund and G Fund. This investment strategy assumes that, while you're still many years away from retirement, you're willing to take on more risk in order to increase your potential investment returns. Also, when you are still at the beginning of your career, you have more time to recoup potential investment losses, especially if you consider that you will keep making monthly contributions to your account for decades.

Depending on your personal circumstances and target retirement date, you would choose one of the five L Funds: L Income, L 2020, L 2030, L 2040 or L 2050 Fund. The L Income Fund is the most conservative asset mix and assumes that you have already started withdrawing your savings. The L 2050 Fund is the most aggressive allocation, with currently about 90% invested in stocks and 10% in bonds.